Charles Read, CPA, USTCP, IRSAC
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Payroll taxes are an important aspect of the employee-employer relationship, and they can have a significant impact on an individual’s take-home pay and overall financial well-being. However, many employees may not fully understand how payroll taxes work or what their rights and obligations are when it comes to these taxes. In this article, we will answer several common questions related to payroll taxes, including whether they are deductible, whether they are pre-tax, and whether they are federal, state, or local. We will also explore whether payroll taxes are progressive and whether they are considered fringe benefits.
Are payroll taxes deductible?
Payroll taxes may include some or all of the following depending on the business and the location of the business and/or the location of employees:
Employee personal Federal Income Tax Withholding
Employee personal State Income Tax Withholding
Employee personal Local Income Tax Withholding
Employee Social Security Taxes
Employee Medicare Taxes
Employer Social Security Taxes on employee wages
Employer Medicare Taxes on employee wages
Federal Unemployment Taxes
State Unemployment taxes
Other State mandated taxes based on wages paid or headcount
Local Taxes are mandated based on wages paid or headcount
For businesses, all these payroll taxes are deductible expenses, which means they can reduce the amount of taxable income on the business’s business tax return.
Payroll taxes are not generally deductible on an individual’s federal income tax return.
Are payroll deductions pre-tax?
Some payroll deductions are pre-tax, which means they are deducted from an employee’s gross pay to create “Taxable Wages”. Taxable wages are used for tax calculations such as withholding, social security, Medicare, and more. This can result in a lower tax burden for the employee and the employer. Pre-tax deductions may include things like:
Premium-only healthcare plan premiums
Section 125 Cafeteria plan
Health Savings Accounts
Flexible spending accounts
Are payroll taxes Federal, State, or local?
Payroll taxes may include at federal, state, and local levels with each having taxes calculated differently. The Federal government collects Social Security, Medicare, and Federal Unemployment Taxes; as well as Employee Federal Income Tax withholding.
The States may collect Employee State Income Tax withholding, State Unemployment Taxes, Family Paid Leave Taxes, Employee Training Taxes, Paid Temporary Disability Taxes, and more depending on the State.
Local jurisdictions can collect various taxes including Income Tax Withholding, Transit Taxes, School District Taxes, and more depending on the location of the business and its employees.
Are payroll taxes progressive?
No, payroll taxes are not progressive. They are in fact regressive. Payroll taxes are flat until you reach the income limit the tax is imposed. For instance, the Social Security Tax is a flat tax, meaning that everyone pays the same percentage of their taxable income up to a certain limit. For 2022, the Social Security tax rate is 6.2% for employees and 6.2% for employers, with a wage base limit of $147,000. Medicare taxes are also a flat tax of 1.45% for employees and 1.45% for employers, with no wage base limit.
After the social security limit is reached higher earning employees cease to pay those taxes on additional income. The percentage of their total income going to that particular tax declines and continues to decline as wages continue to increase. That decreasing percentage is the definition of regressive taxation.
Are payroll taxes considered fringe benefits?
Payroll taxes are not considered fringe benefits. Fringe benefits are non-wage compensation provided by and paid for by the employer for an employee. These can include employer-paid health insurance, retirement plans, education assistance, and many others.
In conclusion, payroll taxes are an essential aspect of running a business and funding government programs. Payroll taxes are deductible for businesses, but not for employees. Payroll taxes can include federal, state taxes and local taxes. They may be based on work location, business location, employee residence or other criteria.
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